Five Ways to Improve Your Credit

Your credit is important and impacts your ability to qualify for credit cards and loans, and plays a huge role in the amount of interest you pay. But that’s not all – your credit also affects how much you pay for auto and home insurance, whether you get that job (in some states and for some companies), and the deposits you will pay for utilities.

Your credit information is compiled by the three credit reporting agencies – Equifax, Experian and TransUnion. They receive the information from creditors such as credit card issuers, mortgage lenders, auto finance companies, financial institutions, retailers, finance companies and student loan lenders including Sallie Mae which results in a individual credit report for each one of the credit reporting agencies. In other words, you have three different credit reports – one for each of the three major credit reporting agencies, and they can all vary depending on the information reported by your lenders. If you are looking to improve your credit, it’s important to consider all three of your credit reports.

There are five important factors to understand when working to improve your credit, let’s take a closer look at each.

1. Payment History

This is the most important factor in evaluating your credit worthiness and your credit score. Payment history indicates how well you pay your bills currently and in this past; this is your track record. This includes late payments and serious delinquencies such as charge-offs, collections and bankruptcies. A history of managing your accounts and paying them off on time shows lenders that you’re responsible and can manage your credit accounts wisely, which means you’ll most likely continue to do the same if they were to extend you a loan.

2. Amount Owed

Payment history is important, but how much you owe is the second largest factor and both creditors and your credit score will look at how much you owe on your credit obligations. This includes how much you owe by account type and total, and also factors in how much you owe on credit cards compared to the total of the credit limits. The credit limit is the maximum amount you can charge on your credit card and the closer you are to the credit limit, the riskier you will appear.

For example, if your total credit limit on all your credit cards is $10,000 and your total balances are $5,000, you have used 50 percent (5,000/10,000 *100) of your credit limit or available credit. This is considered actually a high ratio and to keep your credit in good standing and your credit scores from plummeting, you should aim to keep this ratio as low as possible – the lower the better. Keeping a low balance on your credit cards (in relation to your credit limit) shows lenders that you can use credit wisely.

The amount you owe on your student loans, mortgage and auto loans are reviewed but don’t because of the type of account (installment account), they don’t have as much impact as a credit card (revolving account) would, because your loan terms are set and payments are applied over an extended period of time. Don’t let this fool you though, how you pay installment accounts is just as important as any other account so keep them on time.

3. Length of Credit History

This takes into account the age of your oldest account, the average age of all your accounts, and the last time there was activity on each account. If you are new to credit, it takes time to build a history. Hanging onto an older credit card, even if you’re not using it, this shows lenders that you have a long history of established credit. The longer, you have had credit the better.

4. New Credit & Inquiries

Every time you apply for or open a new account, a credit inquiry is created and posted on your credit report, which affects your credit. Seeking new credit is considered negative by creditors, because this can be a sign that you need more credit and can’t pay your bills. Shopping for a mortgage or car loan is an exception and is expected. You should do so within a 30 or 45-day period to have minimal or no impact on your credit. Limiting the number of times you apply for new credit cards or loans can help you improve your credit over time.

5. Types of Credit

Your credit report lists the number of your accounts and categorizes each by type of account, including: revolving (retail and bankcards), installment loans (auto and student) and mortgages. This shows that you have qualified for a variety of accounts and creditors can evaluate how you have handled these types of credit. The important thing here is to vary your types of credit accounts and to avoid having only one type of account, all credit cards, for example.

When it comes to improving your credit it’s important to be realistic – there is no quick fix and it will take time to rebuild and establish good credit. Make sure you pay your bills on time, keep the amounts you owe low, don’t close older accounts, don’t seek credit unnecessarily and have a healthy mix of accounts and you’ll gradually build and achieve those high credit scores you’ve always wanted.